How Mifid II will help with fee transparency

Broadly speaking, firms will need to be required to provide disclosures at point of sale, and periodically, each year, to all clients.

From 3 January onwards, asset managers will be forced to break down costs clearly and simply into four key categories for each fund.

In a nutshell, these are: 

• The ongoing charge.
• One-off fees such as entry and exit charges.
• Incidental fees, such as performance charges.
• Transaction fees relating to the investment product.

Mifid II is clear about what cost information must be made plain to investors. As outlined by Susann Altkemper, counsel for City law firm CMS, this must specify: “All costs on an aggregated basis, relating to both the service or ancillary service provided, plus the costs incurred in relation to the investment recommended or marketed.

“Disclosures must also cover any third-party costs.”

Under Mifid II, to make sure these are transparent and the end investor can understand the breakdown and aggregation of costs, all costs must be expressed in two ways: as a percentage, and as a cash amount.

Moreover, all retail clients will be given an illustration showing the cumulative effect of costs on returns, and any anticipated spikes or fluctuations.

Onus on providers

Linda Gibson, director of regulatory change and compliance risk for BNY Mellon’s Pershing, comments: “The promotion of transparency is in the core of Mifid II and the directive introduces additional requirements relating to the information provided to investors.”

This means any previous disclosure requirements on cost and charges will be enhanced with the obligation for firms to provide the client with a comprehensive illustration of all expected point-of-sale (ex-ante) costs and charges, including their overall effect on investor returns.

Says Ms Altkemper: “While clients will benefit from an increase in transparency, firms will need to develop compliant costs and charges disclosures.”

Cost disclosure will not push everyone into passive, but it will show clearly the quality of the fund. Jackie Beard

She says this will involve advisers having to collate data internally, and even from external sources, such as other firms in the distribution chain.

Accordingly, this will mean greater collaboration and data sharing between provider, distributor, adviser, platform and anyone else involved in the chain. 

The purpose of this is to ensure that the client gets a specific and tailored breakdown of all the costs and charges they have paid out.

Ms Gibson adds: “The requirement of post-sale (ex-post) periodic disclosure essentially means the obligation to provide a personalised and annualised breakdown of all costs to the client.”

On this point the FCA is likely to provide further guidance based on industry feedback to previous consultations.

Drive to passive?

Some commentators have suggested an increased focus on fees and greater clarity around breakdown of costs will drive more advised clients away from actively managed funds to passively managed funds in the hunt for cheaper options.

But for Jackie Beard, director of manager research services for Morningstar, the Mifid II changes do not offer so much a comment on active versus passive management, but does focus on whether the client is getting what they are paying for.

She explains: “If you are paying for an active manager and you are getting the alpha you expect, then you are getting value for money. Cost disclosure will not push everyone into passive, but it will show clearly the quality of the fund.”

According to Ms Beard: “We have always viewed price as a key component in a fund’s success or failure.

“The increase in fee transparency, brought about by Mifid II, is welcome, in our view.”

Practical help

Barry Neilson, business development director for Nucleus, says with the onus on the adviser to provide clients with a statement of total costs and charges, this might mean that client agreements and product illustrations will have to change. 

While this might be a lot of administration, he adds: “This could be good in exposing the costs of vertically integrated firms, it is arguable whether the new rules will boost transparency, as there is no standardised format for disclosure, and it is not clear what the impact will be for initial advice.”

This is one of the reasons why Sarah Lyons, head of marketing at Ascentric, says full disclosure of fees and charges is going to be a big change.

She comments some platforms are helping advisers with pre-sales illustration tools, which will now include all costs and charges, as well as the aggregate figure.

Ms Lyons adds: “Advisers with access to this tool will be able to produce Mifid-II compliant pre-sales illustrations.”

Regardless of the way in which providers and platforms are giving information on fees to distributors and clients, the improved transparency will be helpful to advisers.

David Ogden, compliance manager for Seven Investment Management, says periodic statements provided to clients on a quarterly basis as required will incorporate all these costs and charges, but more detailed information will be available on request "from the beginning of 2019, which we believe is the industry standard approach", he adds.

It will certainly bring upfront, clear and easier-to-digest information to the adviser and investor's view.

As Hugues Gillibert, chief executive of Fitz Partners, states: “As Mifid II covers both investment products and investment services costs, it will bring transparency or at least more completeness, from an investor’s perspective. 

“The measure of fund acquisition costs or investment services is definitely an improvement.”

simoney.kyriakou@ft.com